Google: Whiz Kids or Naughty Boys?

August 18, 2004

By Ben Elgin Even when Google was bathed in adulation and investor exuberance, its management was a question mark. After all, how could Larry Page and Sergey Brin, the thirtysomething co-founders and unquestioned leaders of the search trailblazer, be expected to propel Google (GOOG) to the top of a market populated with brawny and seasoned competitors such as Microsoft (MSFT) and Yahoo! (YHOO)?

Google was long able to shrug off such questions by simply pointing to its track record. Page and Brin zeroed in on search in the late 1990s, even as competitors wrote it off as insignificant. They killed a multimillion dollar ad blitz in 1999, instead banking on word-of-mouth marketing. And they silenced efforts to clutter their site with banner ads, favoring instead a spartan home page. Slam dunks, all.

"CHALLENGING AND DIFFICULT." Now, amid a series of missteps on its road to a public offering, Google's management is coming under much closer scrutiny. In its pre-IPO paperwork, Google disclosed it may have violated securities laws by improperly allocating more than 23 million shares to employees and consultants -- no minor oversight. In its early pre-IPO presentations to would-be investors, Google's founders came off as elusive and ill-prepared, according to analysts and money managers.

The company also suffered an embarrassment on Aug. 18, when it had to scale back the size and price of its unusual Dutch auction public offering. Presumably because of underwhelming investor demand, Google cut the expected price to between $85 and $95 per share from the previous $108 to $135 range, at the same time it slashed the number of shares offered to 19.6 million, from 25.7 million.

All told, its intensely scrutinized transformation from private company to public has left some investors and analysts concerned about Google's leadership. "These guys are challenging and difficult," says one investment banker not involved in the offering. "One thing the market absolutely finds a way to crush is arrogance."

Already, some are mulling whether Google needs a management overhaul. Martin Pyykkonen, analyst at Janco Partners, believes the search kingpin would be better off taking the day-to-day reins from Google's founders and handing them to a more operationally savvy executive, perhaps one or two years from now. "It'll be important to bring in the right leaders at the right time," he says.

FACT VS. FANCY. As for today, just what kind of clout does Google's oft-described "adult supervision" have? It's a fair question. On paper, the founders Brin and Page operate as a triumvirate with CEO Eric Schmidt, who was hired in 2001 to bring some experience to Google's executive ranks.

Make no mistake: It's a founder-driven company, with Brin and Page wielding veto power over every key decision at the company. Seasoned execs like CEO Schmidt and board members John Doerr of Kleiner Perkins and Michael Moritz of Sequoia Capital play a supporting role to the two youngsters. And, while the end result seemingly worked well for years, it has not aced its transformation to a public company.

Take the IPO and proposed valuation of Google. Page and Brin, of course, want to run a different kind of public company, focused on innovation and long-term results, rather than the short-term quarterly goals espoused by much of Wall Street. It may be a noble ideal. But while Google vowed in its pre-IPO paperwork to avert long-held Wall Street practices, such as offering financial guidance to investors, it also originally projected a sky-high market cap of $36 billion.

FOOT IN MOUTH. It wanted investors to treat it as a premium stock, even though Google wouldn't offer as much information as other companies. Surely, this is a contradiction that Google's seasoned hands could have spotted. "If you want to act like a private company, stay a private company. There's a certain set of responsibilities that come with being a public company," says John Tinker, analyst with Think Equity Partners. "Google wanted to have it both ways."

In another instance, Google's founders granted an interview to Playboy in April, just before it filed to go public. At such a time, most companies squelch discussions with the press to observe Securities & Exchange Commission rules regarding IPO quiet periods. When the Playboy interview surfaced in August, Google was forced to scramble and update its paperwork, as the SEC weighed its impact on the market (see BW Online, "The SEC Could Slap Google").

Although the episode didn't prompt a delay in the offering, some feel it betrayed a lack of wizened decisionmaking on Google's behalf. "That was someone not thinking through the implications of the [interview]," says David Yoffie, professor at Harvard Business School.

The management question becomes even more important when considering the challenges ahead. Google has long prided itself on an unorthodox workplace, nearly devoid of middle management. Engineers are encouraged to spend one day a week pursuing pet projects, no matter how zany. Even back in 2002, as Google chugged past 500 employees, its execs grappled with how to adapt this loose organizational structure to a fast-growing company.

WORK EXPERIENCE. Today, this challenge is far greater than ever. Google is growing at a much faster clip than anytime in its history, adding 3.6 employees per day so far this year, vs. 1.1 in 2002. Now at over 2,200 employees, it'll be hard-pressed to remain nimble, creative, and, at the same time, efficient. While Page and Brin have zero experience managing a company through such a pivotal stage, they haven't exactly handed over the operations reins to a more seasoned hand.

Some business decisions also have shined a spotlight on management's inexperience. Take, for instance, Google's Mar. 31 launch of its e-mail service, Gmail. It was a groundbreaking event, with Google promising users 1 gigabyte of free storage for their e-mail accounts -- 250- and 500-times more than what was offered by Yahoo and Microsoft, respectively.

Few insiders realized that even the timing of the release was flawed. Google, which usually doesn't announce products until they have been tested in trials, had to make an exception with Gmail. In order to test this massive service, the outfit had to bring in thousands of trial users from the outside. It would be impossible to keep such a project secret, so they announced the forthcoming product to the press. With Google threatening to dramatically reshape the Web e-mail market, pundits and journalists buzzed about the groundbreaking developments.

STOLEN THUNDER. Trouble is, Google wasn't anywhere near ready to go commercial with the service. Even today, nearly five months later, Gmail isn't available to the general public. And in that elapsed time, Yahoo and Microsoft have both hunkered down and dramatically revamped their e-mail offerings. On June 15, Yahoo increased its free e-mail storage from 4 megabytes to 100, diminishing Google's edge. Meanwhile, Microsoft this summer began ratcheting up its e-mail users from 2 megabytes to 250.

If and when Google finally opens up its world-beating product to the masses, its main draw will have largely been defused by competitors seeking to retain their tens of millions of e-mail users. "They shouldn't have disclosed the 1-gigabyte [news] until they were ready to launch," says one Google investor. "It was a strategic mistake."

It appears the halo that long adorned Google and its founders has started to fade. To capture the same kind of adulation on Wall Street that it receives from Web surfers, Google will have to address its management shortcomings. Elgin is a correspondent in BusinessWeek's Silicon Valley bureau